Deciphering the Behavior of US Consumers Amid Economic Shifts

The Resilient US Consumer

In the face of rising interest rates and tighter credit, the US economy has shown remarkable tenacity, largely thanks to consumer spending. Although recent signals such as weakened business surveys, dipping consumer confidence, and subdued first-quarter GDP indicate a softening economy, consumer spending, which makes up 70% of GDP, continues to fuel growth. The disparity in financial strength between high-income earners and lower-income groups is becoming more pronounced, with the former group benefiting from their savings and investments, while the latter faces increasing financial pressure.

The Financial Divergence

Consumer spending is supported by income, savings, borrowing, or asset selling. Currently, with flatlining real household disposable income and diminishing savings, many consumers are leaning on credit to sustain their expenditure. However, this reliance on credit, especially with all-time high borrowing costs, raises sustainability concerns. As delinquency rates on consumer loans climb, we face the prospect of weakened consumer spending power in lower-income demographics, which could undermine economic growth in the near future, particularly if job losses occur.

Implications for Interest Rates

The ongoing depletion of savings and the precarious state of credit-based spending suggest potential slowdowns in consumer-driven growth. Such a development could contribute to easing inflation pressure. If unemployment rates increase, it may trigger an inclination towards reducing interest rates. Current predictions foresee possible interest rate cuts later in the year, with the first potentially occurring in a September FOMC meeting.

consumer, economy, inflation